Mass. On Track For Automatic Income Tax Cut — And Budget Gap

Massachusetts taxpayers are looking at a likely cut in the state's income tax rate — a cut that will also contribute to an anticipated $325 million gap in the state budget.

Secretary of Administration and Finance Glen Shor said Thursday that Massachusetts appears on track to meet the requirements to trigger the automatic cut in the income tax rate from 5.2 percent to 5.15 percent in January.

Shor said the cut -- along with other factors including an economic development package passed near the end of the legislative session -- could open the gap in the current 2015 fiscal year that ends June 30.

The state budget is about $37 billion.

Shor said the administration is working up a plan to close the gap and hopes to release it in the next few weeks.

"We will solve the gap," Shor told news reporters. "We are extremely committed to doing so."

He said the plan will rely on spending cuts and won't dip into the state's rainy day fund.

The $325 million gap would come from a loss in revenues from the anticipated tax rate cut ($70 million), a failure of fees and reimbursements to achieve predicted levels ($170 million), and the economic development package ($80 million).

Shor said "the collective hope at the time that the bill was enacted" was that the state would see revenue growth in the current fiscal year that would not only meet predictions, but possibly exceed them.

As of the end of the first quarter of the 2015 fiscal year, revenues were $32 million below those benchmarks.

Shor said the administration waited until after the election to announce the gap because they wanted to see the result of the casino ballot question, which also would have factored into a drop in expected revenue if voters had repealed the casino law.

Several months ago, Gov. Deval Patrick asked lawmakers for special authority to make emergency budget cuts outside of the executive branch if needed. Shor said that request wasn't made in anticipation of a specific budget gap.

Shor said the administration has already alerted legislative leaders about the gap.

He said that while a cut in the income tax was always a possibility, it wasn't built into the budget because budget writers couldn't have anticipated how low inflation has fallen.

Since the income tax cut is determined partly by measuring year-over-year growth in baseline tax revenues and comparing it to the rate of inflation, a lower inflation rate is more likely to trigger an automatic cut.

Massachusetts voters approved a ballot question in 2000 to gradually lower the income tax rate from 5.95 percent to 5 percent. In 2002, the Legislature froze the rate at 5.3 percent, but also added a mechanism that would allow the rate to fall in increments of 0.05 percent if growth in annual revenues meets certain benchmarks.

The rate was reduced from 5.30 to 5.25 percent Jan. 1, 2012, and again last January when it fell to 5.2 percent.